12/1/2017 Business Law Update: Piercing the Veil of Iowa Entities - PDF document

12/1/2017 Business Law Update: Piercing the Veil of Iowa Entities and Related Issues Drake General Practice Review December 2017 Matthew G. Doré Richard and Anita Calkins Distinguished Professor Drake University Law School General Rule of Limited Liability For Corporate Shareholders: § 490.622(2): “Unless otherwise provided in the articles of incorporation, a shareholder of a corporation is not personally liable for the acts or debts of the corporation … .” For LLC Members and Managers: § 489.304(1): “For debts, obligations, or other liabilities of a limited liability company, whether arising in contract, tort, or otherwise, all of the following apply: (a) They are solely the debts, obligations, or other liabilities of the company. They do not become the debts, obligations, or other liabilities of a member or manager solely by reason of the member acting as a member or the manager acting as a manager.” For Limited Partners / LLP Partners: Parallel protection to the LLC Act from §§ 488.303 and 486A.306(3). General Rule of Limited Liability For Directors, Officers, Employees or Other Corporate Agents: No statutory limited liability rule. But a corporation is a separate legal “person,” so no reason directors, officers, employees or other agents should be liable for corporate acts. For LLC / LP / LLP Employees or Other Agents: No statutory limited liability rule. But these entities are legal “persons,” so no reason employees or agents should be liable for entity acts. Cf. § 486A.306: Partners (separate persons from the partnership) ARE vicariously liable for partnership obligations by statutory fiat. “[A] corporate officer is ordinarily not liable in damages for a breach of contract by the corporation.” Boyssuyt v. Osage Farmers Nat’l Bank, 360 N.W.2d 769, 778 (Iowa 1985). 1

12/1/2017 General Rule of Limited Liability--Exceptions Exceptions from Agency Law where corporate directors, officers, employees or other agents might be exposed to personal liability when working for a corporation or other business entity? Tortious Conduct Exception: Restatement (3d) of Agency § 7.01. An agent is subject to liability to a third party harmed by the agent's tortious conduct. Unless an applicable statute provides otherwise, an actor remains subject to liability although the actor acts as an agent or an employee, with actual or apparent authority, or within the scope of employment. See also § 490.622(2)(“… [A] shareholder … may become personally liable by reason of his own acts or conduct.”) See also § 489.304(1)(“[LLC debts, obligations or other liabilities] do not become the debts, obligations, or other liabilities of a member or manager solely by reason of the member acting as a member or manager acting as a manager.”) General Rule of Limited Liability--Exceptions Tortious Conduct Exception: Restatement (3d) of Agency § 7.01. Example: Jasper v. H. Nizam, Inc. , 764 N.W.2d 751 (Iowa 2009) (corporate officer who wrongfully discharged employee personally liable for the tort of wrongful discharge). Example: Estate of Countryman v. Farmers Co-op Assn. , 679 N.W.2d 598 (Iowa 2004) (LLC member/manager could be personally liable for participating in company’s safety decisions relating to odorization of propane that the company supplied to customers). General Rule of Limited Liability--Exceptions Failure to Identify Principal or Failure to Disclose Agency status in transactions: Restatement (3d) of Agency §§ 6.02, 6.03. § 6.02 When an agent acting with actual or apparent authority makes a contract on behalf of an unidentified principal , (1) the principal and the third party are parties to the contract; and (2) the agent is a party to the contract unless the agent and the third party agree otherwise . § 6.03 When an agent acting with actual authority makes a contract on behalf of an undisclosed principal , (1) unless excluded by the contract, the principal is a party to the contract; [and] (2 ) the agent and the third party are parties to the contract … . Example: Builders Kitchen and Supply Co. v. Moyer , 776 N.W.2d 112 (Iowa Ct. App. 2009) (corporate officer personally liable on contract for purchase of cabinets not only because of guaranty provision in contract, but also because officer failed to indicate corporation was his principal when signing the contract ). 2

12/1/2017 General Rule of Limited Liability--Exceptions Breach of Implied Warranty of Authority to act for corporation: Restatement (3d) of Agency § 6.10. A person who purports to make a contract … with a third party on behalf of another person … gives an implied warranty of authority to the third party and is subject to liability to the third party for damages for loss caused by breach of that warranty … unless … (2) the person who purports to make the contract, representation, or conveyance gives notice to the third party that no warranty of authority is given; or (3) the third party knows that the person … acts without actual authority . Example: Ritz v. MyMor Homes, Inc ., 213 N.W.2d 470 (Iowa 1973) (where it was not clear whether agent had authority to promise that principal would make home repairs, trial court should have submitted the agent’s implied warranty of authority as an alternative liability theory against agent). The “Veil-Piercing” Exception: What is the Iowa “test”? Is the corporation a “mere shell,” “intermediary,” “alter ego” or “instrumentality” of the shareholders? Is the corporation a “sham”? Iowa courts have used all these metaphors, but they are not particularly helpful. The “Veil-Piercing” Exception: What is the Iowa “test”? Other tests: A corporate entity is the alter ego of a person if (1) the person influences and governs the entity; (2) a unity of interest and ownership exists such that the corporate entity and the person cannot be separated; and (3) giving legal effect to the fictional separation between the corporate entity and the person would ‘sanction a fraud or promote injustice.’ HOK Sport, Inc. v. FC Des Moines, LC , 495 F.3d 927,941 (8 th Cir. 2007). 3

12/1/2017 The “Veil-Piercing” Exception: What is the Iowa “test”? Other tests: “The corporate veil may be pierced under exceptional circumstances, for example, where the corporation is a mere shell, serving no legitimate business purpose, and used primarily as an intermediary to perpetuate fraud or promote injustice.” Briggs Transportation v. Starr Sales Co ., 262 N.W.2d 805, 809 (Iowa 1978). The “Veil-Piercing” Exception: What is the Iowa “test”? Most commonly applied test: The Briggs factors. Briggs Transportation v. Starr Sales Co., 262 N.W.2d 805, 809 (Iowa 1978): (1) Was the corporation undercapitalized? (2) Did the corporate participants follow corporate formalities? (3) Did the corporation keep separate books? (4) Were corporate finances kept separate from individual finances, or did the corporation pay individual obligations? (5) Was the corporation used to promote fraud or illegality? (6) Was the corporation a mere sham? Source of Briggs factors? Lakota Girl Scout Council, Inc. v. Havey Fund-Raising Management, Inc ., 519 F.2d 634, 638 (8 th Cir. 1975) (applying these factors to pierce corporation’s veil in order to assert personal jurisdiction over its sole shareholder). The “Veil-Piercing” Exception: Iowa “test” applied. Briggs Transportation v. Starr Sales Co ., 262 N.W.2d 805, 809 (Iowa 1978) Facts: A family-owned corporation purchased merchandise from plaintiff on credit. In the process, one or more of the shareholders falsified the corporation's credit history, resold the delivered merchandise, and misappropriated the proceeds without payment to plaintiff. These events, together with evidence that the corporation had never been properly capitalized and that no formalities had ever been observed, persuaded the Iowa Supreme Court that piercing was a proper remedy. 4